CQ reader and New York attorney Eric O. Costello, Esq. has followed the Air America story over the past several days here at CQ, Michelle Malkin, and Radio Equalizer. He sent me an e-mail this morning that comprehensively looks at the legal issues surrounding the transfer of $875,000 from a Bronx non-profit to Air America -- and also the notion floated by Al Franken that a "forensic" investigation had already brought this to Piquant Media's attention. Mr. Costello has kindly consented to publication of his observations:

I am a lawyer, admitted in New York State since 1992, with a fair amount of experience in corporate transactions (I used to do a lot of corporate/SEC work -- I'm mostly in litigation, these days). I also was on the board of directors of a not-for-profit corporation for over a decade, serving as one of that corporation's officers as well. Please excuse any rambling that occurs in the following text (which you may quote from, freely, as I use no names other than my own).

Frankly, I'm aghast that the directors and officers of Gloria Wise approved the loans to the Air America affiliate, as has been reported. Aside from the obvious fact that there would be problems in taking funds earmarked for specific purposes (possibly violating the terms of the monetary grants -- had the monies come from a foundation, and the foundation was made aware of the diversion, Gloria Wise's name would be mud forevermore, and word gets around the foundations pretty fast), and aside from the fact that this would have been a very large chunk of Gloria Wise's liquidity (assuming a $400,000+ series of loans -- where the hell were Gloria Wise's accountants in this?), I would imagine it would be highly problematic, under the charter and by-laws of Gloria Wise, to make such loans to Air America's affiliate.

Typically, the charter and/or by-laws of a not-for-profit spell out what restrictions there are on investments that can be made. (Query: what's in the charter and by-laws of Wise?) It's been a while since I've looked at the New York Not-for-Profit Corporation Law, but I can well believe that the loan to the Air America affiliate would not be allowed, especially (as I'll bet is likely) it was unsecured, or secured only by unregistered and illiquid stock. At my not-for-profit, we stuck to bank accounts and CDs for any cash waiting around to be applied for the purposes for which it was earmarked. The insurance company that provided the "D&O" insurance for Gloria Wise must be having (to use the, ahem, non-legal phrase) the screaming whim-whams.

Follow the money, but also follow the minutes of the meetings of Gloria Wise's board of directors. There should be some discussion in there, and (ideally) a written presentation to the board discussing the investment, considering this would be a material amount of Wise's cash resources. That is, if the directors of Wise were doing their job properly.

(This doesn't even get into the mind-bending conflict-of-interest issues here, which others have pointed out. On my board, we had long and involved discussions on the subject of officer and director conflicts, and we eventually adopted a conflicts procedure, after getting a lot of advice on the subject from experts in the field. This was funded by a grant from a foundation that wanted to strengthen our corporate structure and activities. Thanks be to God, the other officers and directors of my not-for-profit were blessed with sense, both of the common sense and moral variety.)

The use of the term "forensic" by Al Franken is interesting. "Forensic accounting" is a term well known in the legal community. I've attended CLE [continuing legal education] courses on "accounting for lawyers" that talk about exactly that -- and usually this comes up *after* the fact, after some corporate entity has gone ker-splat (another legal term there, forgive me). It strikes me that if Franken is using the term correctly (I admit, a good question), this would imply that the new owners of Air America didn't know of the issue before they bought in, possibly because of poor documentation of the loans (i.e., no note, no record). Poor documentation of loans is a Bad Thing, to use yet another legal term.

By the way, anyone know the terms of the loan(s)? What interest rates, what term, what security? Was this a sweetheart loan, on terms that Air America couldn't have received at, say, Bank of America or J.P. MorganChase (or other Enron lenders). Any personal guarantees by individuals here, considering this was a startup? If so, anyone collecting on them? If not, why the hell not?

Finally, one last point: I doubt the FCC or SEC has jurisdiction over this matter (private firms, and Air America doesn't own stations, as far as I know), but you know who has statutory oversight over New York State not-for-profits? The New York Attorney General's office. That's right, ladies and gentlemen, E. Spitzer, Esq., Scourge of Wall Street, with an assorted collection of trophies mounted on his wall, would be the point man for any investigation of this matter. Surely (we ask rhetorically) Spitzer will be eager to investigate such blatant conflicts of interest, risky lending, and other sort of malfeasence, no? That is, unless his run for governor is putting a crimp on his time.

In my reply, I pointed out that Jeanette Graves alleges that the Gloria Wise board knew nothing of most of these transfers, but Mr. Costello quickly replied:

Even if Graves is telling the truth, *somewhere* there's got to be something in the board minutes of Wise. We had regular updates on the budget and balance sheet of my not-for-profit, complete with hard-copy presentations, and it would strike me that a $400,000+ loan is going to show up on the balance sheet *somewhere*, and any director worth his or her salt is going to ask questions about this, rubber stamp or no.

I admit, that's a darned good point. I serve in essentially the same position as Ms. Graves for a local non-profit here, one with just a fraction of the Gloria Wise budget. However, that kind of money should have shown up in their budget statements, which gives a whole new dimension to this scandal.

Eliot Spitzer, where are you? And where is the mainstream media?

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